06/29/2009

Much has been written
over the last week about the recent demise of Lucidera, one of the on-demand BI
pioneers. Some writers saw it as a general sign of the current economic
times during which venture funding has become harder to raise. Others saw it as
a direct consequence of the unsustainability of Software as a Service
models. In my opinion, none of these are the reasons for Lucidera’s
failure.

Lucidera started as a
well-capitalized startup. The company had raiased over $20M in 2 rounds
of funding from very well-respected investors with long experience in funding
successful IT startups. In addition to its strong founding team it had
also attracted top management talent, most recently Rob Reid who last year
became the company’s CEO. Lucidera benefited from the strong overall
interest (by customers, investors, and executives) in on-demand software and
its application to business intelligence. So, what went wrong?

My suspicion is that
Lucidera made two wrong choices which led to its predicament. The first
wrong choice was around its platform. To expedite its time to market,
Lucidera started building its on-demand BI platform by modifying an existing
platform that had been developed by Broadbase. While at the time this
might have appeared as a brilliant idea, my sense is that the company couldn’t
make things work out the way it was expecting. Perhaps the platform was
not scaling to the expected levels. Or modifying it to make it into a
modern multi-tenant SaaS platform was taking longer and costing more than
expected. The wrong choice of platform could also have another financial
consequence: operating the platform was more expensive than originally
projected. This means that to properly scale and process the data sets the
customers wanted to analyze, more hardware than the team had originally planned
was necessary, implying that the company was burning through more money than it
had anticipated. My suspicion is that Lucidera’s management team may have
decided to focus on specific analytic applications in order to finesse some of
the platform issues. Unfortunately, the second mistake was due to the
applications chosen to be built on top of the platform. While I’m sure
these applications were selected in order to address a genuine market need, I
wouldn’t be surprised if their selection was also due to the underlying
platform’s shortcomings. However, I think that customers were not willing
to pay as much for these applications as the company may have expected.
If this is true, then it would imply that the company was burning through cash
faster than it had anticipated.

Its burn rate caused
Lucidera to seek a new round of funding in the fall. It is true that last
fall was the absolute worse time for companies to be raising money.
However, the timing alone was not the reason Lucidera failed to raise
money. While last fall venture investors had turned mostly inward and
were scrutinizing potential investment opportunities much more than usual,
financings did get done, especially in companies that were performing
well. For example, Pivotlink, one of my portfolio companies and a direct
competitor to Lucidera, closed its most recent round in January. Good
Data, another Lucidera competitor was funded about the same time. I’m sure
the investors that were considering Lucidera had difficulty seeing how the
company’s business model around the analytic applications it had developed was
going to succeed, particularly during these economic times. As a result,
investors didn't want to invest additional money since they couldn't see their
way to a return.

Some also say that
investors may be having second thoughts about funding SaaS companies today
because on-demand software models are not capital-efficient. They claim
that the reason for this inefficiency is because SaaS vendors must invest
upfront for the creation of the infrastructure (including the data center) on
top of which the on-demand solution is running. While it is true that
SaaS companies require more upfront capital to set up their infrastructures
than their on-premise counterparts, more recently, as a result of the lessons
that have been learned from the SaaS pioneers, and the use of open source
software and commodity hardware, the capital requirements of SaaS companies have
decreased significantly making on-demand software companies as capital
efficient (if not more) as on-premise ones. Moreover, judging from the
financing activity of the last 6 months one can safely conclude that SaaS may
be the only software models funded by venture investors.

Will Lucidera’s demise
have a long-term impact on on-demand BI? I don’t think so.
Lucidera’s customers may spend some time thinking whether to sign up with
another SaaS BI vendor, even though both Pivotlink and Good Data have announced
programs for taking over Lucidera customers. However, demand for SaaS BI
solutions is growing. I can state this not only because of Pivotlink’s
and Host Analytics (another of my SaaS BI portfolio companies) success, but
also because of discussions with large on-premise BI vendors all of which are
readying SaaS offerings. In fact, SAP/Business Objects will introduce a
new offering this fall. The demand is growing because corporations of any
size and industry are starting to realize the attraction of on-demand BI’s
value proposition (time to value, strong and quick ROI, small set of
preconditions). You don’t need to: (a) have your data already in the
cloud, (b) work with only small data sets, or (c) try to address simple
problems before you can effectively utilize on-demand BI, as some people
claimed. As with on-premise BI approaches, you need to start with the
right vendor that is adequately capitalized, has the right platform and the
right business model that allow it to grow profitably and quickly become a
self-sustaining company.